Shares in outsourcing firm Serco (SRP) jumped 4% to 141p after it raised its forecast for full-year underlying trading profit due to a better than expected performance in the first five months of the year.

Commenting on current trading, the firm said all four of its divisions were in line with or ahead of their budgets up to the end of May, with volumes in Testing and Tracing particularly strong and likely to remain that way for longer into the second half than anticipated.

As a result, trading profits are seen £15 million higher than originally forecast at £200 million. This compares with a company-sourced consensus estimate of just £166 million and a top estimate of £173 million, meaning analysts are going to have to revise up their numbers by some way.

MAJOR CONTRACT WIN

There was more good news with the announcement that the firm’s 50/50 joint venture with French energy group Engie had been awarded contracts to provide asset and facilities management services for the UK’s defence establishment by the Ministry of Defence.

The joint venture won the two largest of four contracts tendered, worth a core value of £900 million over seven years. In addition to the core fixed-price contracts, there is likely to be a ‘significant’ amount of additional project work which could increase their value by another £2.5 billion, and there are three further one-year options for the MoD to extend the works.

After a six-month mobilization phase, the core work is expected to begin next February with additional project work ramping up as the year progresses. Engie and Serco will share half the profits from the joint venture, which will likely mean even more earnings upgrades.

Analysts at Numis have raised their earnings per share forecasts by 8% for this year and 4% next year after today’s news, and say they ‘continue to believe Serco’s industry reputation, operational delivery and low financial leverage place it in a strong position to deliver organic growth, enhanced by M&A with margin improvement’.

READ MORE ABOUT SERCO HERE

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Issue Date: 14 Jun 2021